Point/Counterpoint on the Rydex/Wisdom Tree Managed Futures Funds

It seems our recent newsletter covering Wisdom Tree’s Managed Futures ETF (WDTI) and Rydex’s Managed Futures Fund (RYMFX) has caused a bit of controversy in the blogosphere, with Victor Sperandeo, chief executive of Alpha Financial Technologies LLC, posting a response to our critique. We are happy the debate is now out in the open, and respectfully submit the following counterpoints.

We agree, the DTI™ is a managed futures strategy – we never said it wasn’t. The DTI™ looks very similar to many long term trend following type managed futures programs, with the main exceptions we see being a smaller universe of markets followed and artificial constraint against short energy positions.

Our point is that it is only a SINGLE strategy in an asset class containing thousands if not tens of thousands of strategies. Our problem with the Rydex and Wisdom Tree products is that they imply, via their name, that they give access to the Managed Futures asset class and/or track an index of managed futures PROGRAMS. If they were named “Managed Futures Replication Strategy” funds or something similar, we would have no issues.

But as they stand, it is similar to coming out with a product named “US Stock Market ETF” which doesn’t track multiple companies and facets of the US stock market, but instead only trades a single stock like IBM. Doesn’t that seem a little off base?

2. The Wisdom Tree Managed Futures ETF and Rydex Managed Futures Fund do not track the same index.

We stand corrected here, although returns since inception of the two products show very little deviation.

3. The DTI™ does not significantly underperform the Newedge CTA Index, having outperformed the Index since 2004.

I believe we laid out in our piece the performance of the DTI™ versus the Newedge CTA Index both from 2004 to 2007, AND from 2007 onwards. We showed the outperformance from 2004 to 2007 quite clearly (indeed saying that was likely the reason Rydex used it as their “index”), so not sure about the charge of ‘cherry picking’.

And two important points to consider with the numbers in Mr. Sperandeo’s rebuttal. One, he uses the DTI™ Total Return numbers in his rebuttal, which include T-Bill interest. Fair enough, considering most managed futures funds receive T-Bill interest, but worth knowing none the less. Two, the DTI™ total return numbers do not include any cost adjustment. Rydex charges 2% per year to follow it – surely that number must be included in a comparison of the two, as the Newedge CTA index is calculated with the component programs AFTER FEE returns.

If we look at the full track record (Jan 2004 through Feb 2011) of the DTI™, DTI™ Total Return, and DTI™ Total Return less a 2% annual fee versus the Newedge CTA index, we come up with the following numbers, which can speak for themselves.

[Past Performance is Not Necessarily Indicative of Future Results]

Source: DTI™ (aftllc.com), Newedge (Newedge.com)

At the end of the day, the performance numbers of the investment products, not the underlying indicator, will be the ultimate judge as to whether the Rydex and Wisdom Tree products successfully track their namesake “Managed Futures”. We don’t believe they will see long term success beating the managed futures indices (or if they are even trying to beat those benchmarks) because they track only a single strategy.

And to make our argument as to why – we’ll quote Mr. Sperandeo himself:

“admittedly, a diversified portfolio of 20 or more trading programs with 100’s of strategies will often generate more favorable statistics than a single strategy, from the diversification standpoint alone.

… Furthermore, the 20 (current) funds comprising the NewEdge CTA Index are not all pure trend-following strategies. This gives the Newedge CTA Index a distinct advantage during the 2009 and early 2010 periods, where a lack of sustained trends across several key markets created a difficult environment for many trend-following strategies and indexes.”

We couldn’t have said it better ourselves. If you want TRUE managed futures exposure, in our opinion, you need a portfolio of different trading programs diversified across various trading strategies which pure trend following is but just one component.

Now we will readily admit that does take more than $5,000, and can take well into the millions – so these products may indeed be the closest a small investor can get to managed futures. But even if that is the best they can get, should they still be named as they are?

Comments

I do not agree with your criticism of WDTI. I think WDTI is great for long term, non-accredited AND accredited, investors. Bottom line, it seems WDTI’s net performance (using the DTI index, taking out the 0.95% annual fee every year) from 2004 through 2010 is just above 5% per year. Not bad considering they use no leverage. When an accreditied investor invests in a managed futures fund through a wirehouse who has feeder funds, they can get in with only $10,000, but the TOTAL fees are very high around 3-7+%. If one wants to invest directly in a true world class managed futures fund with a proper long-term track record, one needs at least $1M – $10M. Even in this situation, TOTAL fees can be 2-5+%. On top of the high fees, you get poor liquidity and very little transparancy, along with conerns of how much leverage they are using. All in all, there are many managed futures funds that have performed worse than WDTI. I think WDTI is a great way to get professional and disiplined long term trend following exposure in one’s portfolio at a fraction of the cost. Also, not using leverage makes WDTI an excellent, sustainable long term investment that you can feel pretty safe will never “blow up.” Are you critical of WDTI because it threatens your business?

Thanks for taking the time to read our post and provide your perspective. Here are our thoughts:

1. Though the program is described as not using leverage, it does trade in futures contracts which have built in leverage. So while the funding is not leveraged, the investment vehicle itself has leverage built in where it will trade Crude Oil futures, for example, by putting up $8,000 to trade $80,000 worth of Oil. Traditional managed futures program operate in the same way, not leveraging up investor allocations, but rather using the leverage built into the futures contracts they invest in.

2. We’re not a fan of the feeder funds you’re referencing, either. Those fees are outrageous. But as far as the minimums for gaining direct access, your $10 million is way too high. We believe an investor typically needs around $250K to gain access to high quality managed futures programs.

3. You seem to be confusing managed accounts and managed futures funds. We promote managed accounts, which do not suffer from the same liquidity and transparency problems that plague funds.

4. WDTI can be a good way to get long term trend following exposure – per the single model it tracks. But does that make it right to label it a Managed Futures ETF? That is our problem. It is marketed deceptively, trying to capitalize on the managed futures asset class when it doesn’t track the asset class as a whole very well. That is why we are critical.

5. It may threaten our business, and as such we do have an incentive to point out all that is wrong with it, but that doesn’t make those points incorrect.

Search

Social Media

DISCLAIMER

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. You should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making such a decision on the appropriateness of such investments.

The entries on this blog are intended to further subscribers understanding, education, and - at times - enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

The mention of specific asset class performance (i.e. +3.2%, -4.6%) is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship and self reporting biases, and instant history.

The performance data for various Commodity Trading Advisor ("CTA") and Commodity Pools are compiled from various sources, including Barclay Hedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The mention of general asset class performance (i.e. managed futures did well, stocks were down, bonds were up) is based on RCM’s direct experience in those asset classes, estimates of performance of dozens of CTAs followed by RCM, and averaging of various indices designed to track said asset classes.

The mention of market based performance (i.e. Corn was up 5% today) reflects all available information as of the time and date of the publication.

The owner of this blog, RCM Alternatives, may receive various forms of compensation from certain investment managers highlighted and/or mentioned within the blog, including but not limited to retaining: a portion of trade commissions, a portion of the fees charged to investors by the investment managers, a portion of the fees for operating a fund for the investment managers via affiliate Attain Portfolio Advisors, or via direct payment for marketing services.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.

Archives

RCM Alternatives

Disclaimer

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The mention of market based performance (i.e. Corn was up 5% today) reflects all available information as of the time and date of the publication.